What Is The Coverdell Education Savings Account (ESA)?

One of new products that came out of the Budget Reconciliation Act of 1996 is
the Coverdell ESA. The Coverdell ESA offers the potential for tax-free growth
when you use the account to fund a child's qualified higher education expenses.

Contributions

Parents, grandparents and other family members can contribute up to $2,000 per
year (non-deductible) into an Coverdell ESA for each child under age 18 so long
as your modified adjusted gross income (MAGI) is below $220,000 for joint filers,
or below $110,000 if you're single. Your child under 18 is named as the beneficiary
on the account, with a parent or legal guardian named as the responsible individual.

Withdrawals

The principal grows tax-free until distributed. Withdrawals from an Coverdell
ESA are free from federal income taxes as long as the withdrawals are less than
or equal to the costs associated with post-secondary education, such as tuition,
books, fees, and supplies.

If there are funds left over after your child has finished his or her education,
there are two options: The remaining amount can be withdrawn and given to the
designated beneficiaries with tax consequences, or the remaining amount can
be rolled over into to another Coverdell ESA for the benefit of a member of
the designated beneficiary's family, in which case there are no tax consequences.

Once the Coverdell ESA account holder reaches age 30, the account must be closed
or transferred to a younger member of the family.

Material discussed is meant for general illustration and/or informational purposes
only and it is not to be construed as tax, legal, or investment advice. Although
the information has been gathered from sources believed to be reliable, please
note that individual situations can vary therefore, the information should be
relied upon when coordinated with individual professional advice.

This web site may contain concepts that have legal, accounting and tax implications. It is not intended to provide legal, accounting or tax advice. You may wish to consult a competent attorney, tax advisor, or accountant.